GST issues relating to Partial Use
We commonly come across errors around accounting for GST on property transactions and their financial impact can be significant for the parties involved. Following on from our discussion around whether there is GST or not on property transactions let us now look at the GST impact around partial use when purchasing property.
By law, GST is charged on all land sales and claimed on all land purchases. Exceptions being when that property is used for making non-taxable supplies such as Residential accommodation or the transaction is compulsory zero-rated.
From 1st April 2011 new apportionment rules were introduced requiring suppliers of land or supplies that include land to charge GST on the supply at the rate of zero percent where the purchaser intends to use the land to make taxable supplies.
However, what happens in the case of transactions where there is both a residential and economic activity component to the property transaction. Inland Revenue allows for the apportionment into two distinct supplies for GST Purposes. Each component must be valued separately and be considered independently to determine what GST is payable or receivable.
Let’s consider the following example:
Sarah purchases a new building for $5 million on 30th October 2017. Sarah has a balance date of 31st March. There is no GST included in the supply as it is subject to the zero-rating rules.
Where both the vendor and purchaser are registered for GST AND the purchaser declares on Schedule 2 of the ADLS/REINZ Sale and Purchase Agreement (S&PA) that they intend to use the building for making taxable supplies AND the purchaser does not intend at the time of settlement to use the property as a principal place of residence. Then under Clause 15 of the S&PA it will become compulsory for the transaction to be zero rated for GST purposes.
Sarah intends the building to be mixed-use and to lease the ground and first floor of the building to commercial tenants, and the 2nd floor of the building will be leased to residential tenants.
On acquisition, Sarah applies the rules in section 20(3I) of the GST Act 1985.
- Calculate the nominal tax component that would be chargeable on the value of the supply if subject to the standard rate of GST.
a. $5m x 15% = $750,000
2. Determine the extent to which the building will be used for making taxable supplies.
a. Sarah determines that the building will be used 66.7% for making taxable supplies (rent to commercial tenants) and 33.3% in making exempt supplies (rent to residential tenants).
3. Sarah now needs to account for the proportion of the nominal GST component that relates to the non-taxable use of the goods as output tax on the acquisition of the building.
a. $750,000 x 33.3% = $249,750
4. On the acquisition of the building, Sarah will need to account for output tax of $249,750.
The same principals would apply to transactions where there is both a residential and economic activity as in the case of Farms (Rural farms, lifestyle farms, and orchards), Vacant land where residential use is planned, land used for a Dairy, or hotels and motels where the owner or manager lives onsite.
The rules require the taxpayers to make a fair and reasonable estimate on the intended taxable and non-taxable components of the initial transaction. In subsequent periods after the initial tax deduction claimed the taxpayer may be required to make further adjustments if the actual taxable use of an asset was different to its intended taxable use.
The first adjustment period runs from the date of acquisition (30th October 2017) to the persons first balance date after acquisition or to the person’s first balance date that falls at least 12 months after the date of acquisition. In Sarah’s example, this would either be 31st March 2018 or 31st March 19. Subsequent adjustment periods would run annually from this point.
In our example, Sarah elects to go with option 1 the period 30th October 2017 to 31st March 2018. Her second adjustment period will run from 1st April 2018 to 31st March 2019. There is no limit to the number of adjustment periods in relation to land.
Using our example, Sarah would be required to keep records showing the usage for both the taxable and non-taxable portions. These logs form the basis to make an annual adjustment if the percentages differ or there is a change in use.
This document has been written as a general guide and should not be used or relied upon as a substitute for specific professional advice.